Smuggling Sparks Questions about Philippine Current Account

Several years of sound economic management have left the Philippines with what appears to be one of the strongest government balance sheets in Asia: a current account surplus of nearly 5% of gross domestic product and enough foreign reserves to cover more than a year’s worth of imports.

So why has the peso been among Asia’s weakest currencies this year?

One reason could be a smuggling problem that has resulted in significant irregularities in the country’s trade data. Some analysts say a proper accounting might show that the country’s current account is actually in deficit – at a time when skittish investors have been punishing developing economies that are too dependent on foreign funding.

A recent report from Deutsche Bank shows a wide gap between Philippine imports and the value of exports reported by its trading partners – a gap that has grown significantly over the past two years.

Adjusting to reflect imports more accurately, “we see that the Philippines’ current account had been posting deficits in some periods since 2012,” Deutsche analyst Diana Del -Rosario wrote. “This is contrary to the steady surplus suggested by data from Philippine authorities.”

President Benigno Aquino III has pledged to crack down on smuggling, criticizing the practice in his State of the Union address last year. Ms. Del-Rosario suggested one reason the trade discrepancy has grown recently is that importers may have accelerated their misinvoicing ahead of the crackdown Mr. Aquino ultimately launched at the Customs Bureau last fall.

A 2014 study by Global Financial Integrity noted two channels for potential smuggling. One is “pure” smuggling – and the 7,000 islands in the Philippine archipelago make it an ideal target for someone intent on moving goods into the country undetected. The other is what it calls “technical” smuggling – manipulating customs documentation to misrepresent the value, quantity or quality of goods being imported.

Central bank Gov. Amando Tetangco Jr., in a March interview with The Wall Street Journal, defended the official data and called the studies questioning the Philippines’ current-account position “more sensational rather than rigorous.”

“I’m not saying they’re trying to discredit us, but they should do more analysis,” he said.

Any discrepancies between the Philippine data and those of its trading partners can be explained by different valuation methods, Mr. Tetangco said.

Indeed, data between two trading partners rarely match up exactly. But take Philippine trade with China: Philippine imports from China last year were a full 60% lower than Beijing’s reported exports to Manila, according to Deutsche Bank. That’s far more than can be explained by factors like valuation, timing or currency conversions, the bank said.

The problem of smuggling isn’t unique to the Philippines, of course. But a comparison to similar economies like Thailand and Indonesia suggests Manila’s problem is much more acute, Credit Suisse economist Michael Wan said.

While Mr. Wan won’t go so far as to call a deficit in Manila’s current account, he said an accurate accounting would probably show a much smaller surplus, around 2% of GDP. The most recent government data showed a surplus of 4.96% as of last Dec. 31.

“People who haven’t caught on to the discrepancy in the trade balance could be surprised by that,” he said. “There could be some impact on sentiment.”

It’s hard to know how much that explains the peso’s underperformance this year. Mr. Aquino’s speech, the Global Financial Integrity study and even a mention in the International Monetary Fund’s latest report on the Philippine economy all have brought the smuggling issue to investors’ attention (though the IMF noted that unreported remittances could help offset the impact on the current account).

At the least, it’s surprising that a country growing faster than nearly any other in Asia would see its currency fare so much worse than its peers’. The peso is one of the few emerging Asian currencies that’s down against the U.S. dollar this year, although a rally over the past few weeks has brought it back almost to its year-end level.

Global Source Partners, an economic think tank, disputed the idea that an accurate accounting would require a large correction to the current account. Still, it warned, “until the government is able to steadily close the gap between the declared and the true level of imports, we think that another credit-rating upgrade is unlikely to happen.”

A greater danger is that faulty data could lead authorities to the wrong policy settings. Mr. Wan said the Philippines should learn from the example of Indonesia, where unchecked domestic demand created a yawning trade and current-account deficit.

That was fine as long as foreign investors were willing to fund that imbalance. But when sentiment changed – as it did suddenly during last summer’s “taper tantrum” – Indonesian assets were severely punished.

“The key point is that the import growth we’ve seen is not indicative of the underlying domestic demand growth” in the Philippine economy, Mr. Wan said. “In the next one to two years we could perhaps see the current account position deteriorate quite quickly.”

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